Poverty Estimation in India

According to recent reports, more than a quarter of the population living in rural areas
of India is below the poverty line. Out of the total population living in the rural parts of
India, 25.7% is living below the poverty line whereas in the urban areas, the situation
is a bit better with 13.7% of the population living below the poverty line.

Poverty Estimation
A common method used to estimate poverty in India is based on the income or
consumption levels and if the income or consumption falls below a given minimum
level, then the household is said to be Below the Poverty Line (BPL).

▪ Poverty Line Calculation: Poverty estimation in India is now carried out

by NITI Aayog’s task force through the calculation of poverty line based
on the data captured by the National Sample Survey Office under
the Ministry of Statistics and Programme Implementation (MOSPI).

o NITI Aayog as a policy think tank has replaced Planning

Commission, which was earlier responsible for calculating
the poverty line in India.
▪ Consumption Versus Income Level: Poverty line estimation in India is
based on the consumption expenditure and not on the income levels
because of the following reasons:

o Variation in Income: Income of self-employed people, daily

wage laborers etc. is highly variable both temporally and
spatially, while consumption pattern are comparatively
much stable.
o Additional Income: Even in the case of regular wage earners,
there are additional side incomes in many cases, which
is difficult to take into account.
o Data Collection: In case of consumption based poverty line,
sample based surveys use a reference period (say 30 days)
in which households are asked about their consumption of
last 30 days and is taken as the representative of general
consumption.

• Whereas tracing the general pattern of income is

not possible.
• Reference Period: It is the duration/period during
which the survey is conducted by NSSO workers
in which they ask certain questions to
households.
Key Terms

▪ Poverty: According to the World Bank, Poverty is pronounced deprivation

in well-being and comprises many dimensions. It includes low incomes
and the inability to acquire the basic goods and services necessary for
survival with dignity.
▪ Poverty Line: The conventional approach to measuring poverty is to
specify a minimum expenditure (or income) required to purchase a
basket of goods and services necessary to satisfy basic human needs
and this minimum expenditure is called the poverty line.
▪ Poverty Line Basket: The basket of goods and services necessary to
satisfy basic human needs is the Poverty Line Basket (PLB).
▪ Poverty Ratio: The proportion of the population below the poverty line is
called the poverty ratio or headcount ratio (HCR).

Need for Poverty Estimation

▪ Impact of Welfare Schemes: Poverty estimates are not just important for
academic purposes but are also crucial to track the impact and success
of various government policies, especially social welfare schemes that
are intended to eliminate poverty.

o BPL Census is conducted by the Ministry of Rural

Development (along with the partnership of state), in order
to identify the poor households.
▪ Poverty Elimination Plan: The Poverty estimates in the form of poverty
line are used to formulate poor centric poverty elimination plans.
▪ Constitutional Requirement: Poverty estimation paves the way for
poverty elimination, that in turn prepares the ground for a just and
equitable society.

Measurement of Poverty Line

▪ Absolute Measurement of Poverty

o Absolute Poverty: According to United Nations World

Summit for Economic Development, absolute poverty is a
condition characterized by severe deprivation of basic
human needs, including food, safe drinking water, sanitation
facilities, health, shelter, education and information.

• It depends not only on income but also on access

to social services.
 o Poverty Threshold: The poverty threshold in absolute
measurement of poverty is set using the monetary value of
the basket of essential products (required for basic
needs) and every household whose income is less than this
value will be classified as poor.
o Limited Scope: Absolute measurements of poverty, used by
the World Bank and developing countries like India, rely on a
poverty line which remains constant across geographies and
over time.
o Criticism: Absolute measurement of poverty overlooks
deprivation within countries or the higher cost of living in
developed countries.
▪ Relative Measurement of Poverty

o Relative Poverty: It is present when a household income is

lower than the median income in a particular country and is
used mainly by the developed countries.

• Those who fall into the category of relative

poverty are not necessarily deprived of all basic
needs, but may not experience the same
standard of living as the majority of society or in
other words, they are relatively deprived.
o Poverty Threshold: In this method certain percentage
of economically bottom population is always considered
below the poverty line.
o Criticism: This approach, though, ignores the importance of
the absolute standard of living and assumes that relative
income is all that matters for welfare.

Data Collection Methods

▪ Uniform Resource Period (URP): Up until 1993-94, the poverty line was
based on URP data, which involved asking people about their
consumption expenditure across a 30-day recall period that is the
information was based on the recall of consumption expenditure in the
previous 30 days.
▪ Mixed Reference Period (MRP): From 1999-2000 onwards, the NSSO
switched to an MRP method which measures consumption of five low-
frequency items (clothing, footwear, durables, education and institutional
health expenditure) over the previous year, and all other items over the
previous 30 days.
 o That is to say, for the five items, survey respondents are
asked about consumption in the previous one year. For the
remaining items, they are asked about consumption in the
previous 30 days.

Pre-Independence Poverty Estimation

▪ Dadabhai Naoroji through his book, “Poverty and Unbritish Rule in
India” made the earliest estimation of poverty line (₹16 to ₹35 per capita
per year).

o The poverty line proposed by him was based on the cost of a

subsistence or minimum basic diet (rice or flour, dal, mutton,
vegetables, ghee, vegetable oil, and salt).
▪ National Planning Committee’s (1938) poverty line (ranging from ₹15 to
₹20 per capita per month) was also based on a minimum standard of
living perspective in which nutritional requirements were implicit.

o In 1938, the National Planning Committee was set up

by Subhash Chandra Bose under the chairmanship of
Jawaharlal Nehru for the purpose of drawing up an economic
plan with the fundamental aim to ensure an adequate
standard of living for the masses.
▪ The Bombay Plan (1944) proponents had suggested a poverty line of
₹75 per capita per year.

o The Bombay Plan was a set of a proposal of a small group of

influential business leaders in Bombay for the development
of the post-independence economy of India.

Post-Independence Poverty Estimation

▪ Planning Commission Expert Group (1962), working group constituted
by the Planning Commission formulated the separate poverty lines for
 rural and urban areas (₹20 and ₹25 per capita per year respectively).

▪ VM Dandekar and N Rath (1971), made the first systematic assessment

of poverty in India, based on National Sample Survey (NSS) data.

o Unlike previous scholars who had considered subsistence

living or basic minimum needs criteria as the measure of
poverty line, VM Dandekar and N Rath were of the view that
poverty line must be derived from the expenditure that was
adequate to provide 2250 calories per day in both rural and
urban areas.
o Expenditure based Poverty line estimation, generated a
debate on minimum calorie consumption norms.
▪ Alagh Committee (1979): Task force constituted by the Planning
Commission under the chairmanship of YK Alagh, constructed a poverty
line for rural and urban areas on the basis of nutritional requirements
and related consumption expenditure.

o Poverty estimates for subsequent years were to be

calculated by adjusting the price level for inflation.
▪ Lakdawala Committee (1993): Task Force chaired by DT Lakdawala,
based on the assumption that the basket of goods and services used to
calculate Consumer Price Index-Industrial Workers (CPI-IW)
and Consumer Price Index- Agricultural Labourers (CPI-AL) reflect the
consumption patterns of the poor, made the following suggestions:

o Consumption expenditure should be calculated based

on calorie consumption as earlier.
 o State specific poverty lines should be constructed and these
should be updated using the CPI-IW in urban areas and CPI-
AL in rural areas.
o Discontinuation of scaling of poverty estimates based on
National Accounts Statistics.

Tendulkar Committee (2009)

▪ Expert group constituted by the Planning Commission and, chaired by
Suresh Tendulkar, was constituted to review methodology for poverty
estimation and to address the following shortcomings of the previous
methods:

o Obsolete Consumption Pattern: Consumption patterns were

linked to the 1973-74 poverty line baskets (PLBs) of goods
and services, whereas there were significant changes in the
consumption patterns of the poor since that time, which
were not reflected in the poverty estimates.
o Inflation Adjustment: There were issues with the adjustment
of prices for inflation, both spatially (across regions) and
temporally (across time).
o Health and Education Expenditure: Earlier poverty lines
assumed that health and education would be provided by the
state and formulated poverty lines accordingly.
▪ Recommendations
o Shift from Calorie Consumption based Poverty Estimation: It
based its calculations on the consumption of the items like
cereal, pulses, milk, edible oil, non-vegetarian items,
vegetables, fresh fruits, dry fruits, sugar, salt & spices, other
food, intoxicants, fuel, clothing, footwear, education, medical
(non-institutional and institutional), entertainment, personal &
toilet goods.
o Uniform Poverty line Basket: Unlike Alagh committee (which
relied on separate PLB for rural and urban areas), Tendulkar
Committee computed new poverty lines for rural and urban
areas of each state based on the uniform poverty line basket
and found that all India poverty line (2004-05) was:

• ₹446.68 per capita per month in rural areas

• ₹578.80 per capita per month in urban areas
o Private Expenditure: Incorporation of private expenditure
on health and education while estimating poverty.
 o Price Adjustment Procedure: The Committee also
recommended a new method of updating poverty
lines, adjusting for changes in prices and patterns of
consumption (to correct spatial and temporal issues with
price adjustment), using the consumption basket of people
close to the poverty line.
o Mixed Reference Period: The Committee recommended
using Mixed Reference Period based estimates, as opposed
to Uniform Reference Period based estimates that were used
in earlier methods for estimating poverty.
▪ Tendulkar committee computed poverty lines for 2004-05 at a level that
was equivalent, in Purchasing Power Parity (PPP) terms to Rs 33 per
day.

o Purchasing Power Parity: The PPP model refers to a method

used to work out the money that would be needed to
purchase the same goods and services in two countries.

Rangarajan Committee
The committee was set up in the backdrop of national outrage over the Planning
Commission’s suggested poverty line of ₹22 a day for rural areas.

▪ Objectives

o To review international poverty estimation methods and

indicate whether based on these, a particular method for
empirical poverty estimation can be developed in India.
o To recommend how these estimates of poverty can be linked
to eligibility and entitlements under the various schemes of
the Government of India.
▪ Recommendations

o Methodology Used: The Rangarajan committee estimation is

based on an independent large survey of households
by Center for Monitoring Indian Economy (CMIE).

• It has also used different methodology wherein a

household is considered poor if it is unable to
save.
o Normative and Behavioural level: Poverty line should be
based on:
 • Normative level of adequate nutrition: Ideal and
desirable level of nutrition.
• Behavioral determination of non-food
expenses: What people use or consume as
per general behavior.
o Nutritional Requirement: For normative levels of adequate
nutrition – average requirements of calories, proteins and
fats based on Indian Council of Medical Research (ICMR)
norms, differentiated by age, gender and activity for all-India
rural and urban regions is considered:

• Calories: 2090 kcal in urban areas and 2155 Kcal

in rural areas.
• Protein: For rural areas 48 gm and for urban
areas 50 gm.
• Fat: For urban areas 28 gm and for rural areas 26
gm.
o Poverty Threshold: Persons spending below ₹47 a day in
cities and ₹32 in villages be considered poor.

• Based on this methodology, Rangarajan

committee estimated that the number of poor
were 19% higher in rural areas and 41% more in
urban areas than what was estimated using
Tendulkar committee formula.
o Modified Mixed reference period: Instead of Mixed reference
Period (MRP) it recommended Modified Mixed Reference
Period (MMRP) in which reference periods for different items
were taken as:

• 365-days for clothing, footwear, education,

institutional medical care, and durable goods.
• 7-days for edible oil, egg, fish and meat,
vegetables, fruits, spices, beverages,
refreshments, processed food, pan, tobacco and
intoxicants
• 30-days for the remaining food items, fuel and
light, miscellaneous goods and services including
non-institutional medical; rents and taxes.
▪ Criticism: Rangarajan committee missed the opportunity to go beyond
the expenditure-based poverty rates and examine the possibility of a
wider multi-dimensional view of deprivation.
International Poverty Line

▪ The World Bank defines a person as extremely poor if she is living on

less than 1.90 international dollars a day, which are adjusted for inflation
as well as price differences between countries.
▪ Asian Development Bank too has its own poverty line which is currently
at $ 1.51 per person per day.